Acquisitions Anonymous - #1 for business buying, selling and operating - Should we pay $300 million for this athletic equipment business? - Acquisitions Anonymous 223

Episode Date: August 29, 2023

In Episode 223, Heather (@EndresenHeather) and Michael (@girdley) explore a unique opportunity involving a company that manufactures sports and military protective gear with a significant patent portfolio. The good: the products have some high-profile endorsements. The bad: $300 million is a steep asking price... and what's the real value of those patents?You can find the  listing here: https://mailchi.mp/websiteclosers/15-year-brand-in-the-sports-military-protective-gear-segments-massive-ip-portfolio-of-100-patents-40-repeat-customer-rate?e=57d56ab794Thanks to this weeks sponsors!Employer Flexible will help you take action to streamline your company’s HR processes. They  are the proud provider of flexible and adaptable PEO services. If you’re a small business trying to grow, and you’re struggling with a lack of internal HR or you’re just dissatisfied with your current HR setup, consider Employer Flexible as your next vendor for HR outsourcing services.Check them out at https://www.employerflexible.com/.------------------CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome to another edition of Acquisitions Anonymous. I'm Heather Anderson, one of your co-hosts. Michael and I are looking at a really cool deal today. Slight valuation issue. You'll see it right away, I think, but something that you would be proud to own, and we would actually like to buy it, but just slight discount on the asking price.

So stay tuned and take a look. Thank you. Today's sponsor is Employer Flexible. And what Employer Flexible does is really function as a fractional HR department for your company or business. I've used them numerous times and putting together my companies.

I've used them when I bought companies. I've used them when I started from scratch. And basically, when you're moving quickly or when you don't want to spend the time putting together your own HR department, benefits, all that kind of stuff, and you want to get the scale of being part of a larger group,

you can reach out to employer flexible. And what employer flexible does is give you that buying power as if you're part of a bigger group and all that kind of stuff. And for me, I love working with them for numerous reasons. One is I know the owners and a lot of the staff, and they've always treated me super good.

And then the second thing is I hate HR. Like, I don't enjoy it at all. And this way I can know it gets done right. I get the benefits of having a big fully staffed HR department and the flexibility of having a vendor like employer flexible being there as a partner throughout my journey and making sure that everybody I work with is happy, taking care of, and we can focus on what really matters in our business, which is take care of our customers. So you can find their contact details, locations of their various offices, as well as more details on how they will help your business by going to employerflexible.com. And again, that's employerflexible.com. And thanks to them for sponsoring today's episode. Michael, how are you today? Good. I want to talk about

our worm farm venture. So do I. I mean, that is exciting. Where are we on that? I don't know. Our point person for the worm farm to say not to jump to the recording today. So we need to get Mills on this. But he's like the busiest one of all of us. So I don't know if it's like it was going to work. We're in suspense. So, okay, so two things about the worm farm.

So for those of you just tuning in today, we've had a hugely popular episode on our on buying a worm farm in Northern California. as of this morning, 100,000 people on Twitter have interacted or viewed our post about the Worm Farm episode, which is enormous. But number two, I think, Heather, this, I think it would be some really good content if we actually bought one of these businesses. That's where I'm leaning towards. I think we need to go in together, be the board of directors for this thing.

We could hire a general manager, CEO, the business, have them come in. I think it'd be really good. As Bill and I call it really good radio, like quote unquote, radio, like good, good entertainment. I would be so excited for like every aspect of it, for our listeners and for us. I mean, it's a really cool, interesting company. We, you know, we're excited about it. We just need to get the financials.

I think now we're sort of commiserating with some of our listeners about how hard that can be sometimes, you know, just to get a package. Call us back. Come on. Well, okay. And to be clear, I'm advocating for it. We either do the worm farm or something like the worm farm, like the pizza boat, One of those things, I think we should actually do that.

I think it would be good radio. That's what I'm saying. I have an inside story on the pizza boat. Someone in my contacts is a neighbor of the guy that owns the hotel in front of the pizza boat. And he told me a little story about how the pizza boat guy had to end up paying the hotel to not get kicked off that stretch of the water. Uh-huh. Because he was cutting into the hotel's business a little bit, I guess. For those of you also tuning in and not caught up with this, we did an episode about

the only boat selling pizza in the British Virgin Islands that was for sale. And Bill wanted to fly down and buy it. Good stuff. Okay. So at least, I guess I got to pitch this idea to the other guys, but we all go in, we buy a small business. Like, that's what I think we should do. But it's kind of be entertaining.

It's going to be like worm farm or better. Yeah. I am so ready for this. Let's do it. Let's go. We can record the board meetings and turn them into episodes. We could use it for the CEO search. Like, I think there's so many interesting things we could do with this whole thing.

Yeah. We could raise money. We could even do something a little bit bigger. We could raise money from the listeners because people want to invest in the worm farm. They do, actually. Yeah. Honestly, I think this could be very, very interesting. a lot of people. Okay. All right. So, well, good news is I have a deal for today, and there's no way

we're buying it. But I think it'll be entertaining. We've already decided that. Okay. Well, wait until you see it. It came from a listener, so I think it'll be good. Okay, so I'll go ahead and read it if that's all right with you. All right. Okay. So it is a new business listing. It is a 15-year-old brand in these sports and military protective gear segments. It has a massive IP portfolio of 100 plus patents, 40% repeat customer rate, and used by NFL, NBA, NHL, all these, and different types of athletes. The asking price, are you sitting down, Heather? I am.

Yes, I know you are because I can see you on video. My dad, who is a lovely human being, whatever there was some sort of news to call, he'd be like, are you sitting down? It's like, yeah, like, I'm sitting right next to you. Anyway, okay, the ASCII price, since you're sitting down, is $300 million. Whoa. I don't think I've ever seen that ASCy price that high. That's why I love this episode.

They're bold here. They're very bold. Yeah, you just got to go with it. Sales were $16,205,000, and they earned $2.264 million. So $2.2.2 million. So they are asking just shy of 140 times earnings. Okay, that's a nice multiple. Interesting.

So the good news is if you buy this business and you don't grow it, it will take you 140 years to get your money back. That's my favorite math. I've said that to sellers before when they're like, okay, I want this. I'm like, okay, do you think your business is going to grow? No, probably not. Okay, do you know it will take me 14 years to get that? all my money back. Do you know, I'll be dead by then? So you say that to a seller. They don't think

it's that funny. Michael, I hope you're not dead in 14 years. But this one, we would be dead for sure. Yes. Well, that's very kind of you. I mean, the odds are stacked against me. I'm very large. You know, I'm six foot five. I'm left-handed. I have a history of some family, like, health issues. So I'm trying hard, but there's a good shit. And I'm accident proud. So like, all those things are No, no. They're not in a way. Okay, shoot. Did you know left-handed people die on average younger than right-handed people?

I did not know that. Why? I mean, what's the reason? The theory that I've read, and usually we die like 12 to 15 months younger on average, the theory that I've read is because the world is designed for right-handed people. And so we keep getting ourselves caught in like combines, using right-handed scissors the wrong way. and like, you know, stouters. Okay, I buy it, but okay, so I'm short and I'm right-handed, so apparently I've got good odds here,

living a long time. Being a female helps also, if you guys live longer than us. That works too. Well, that was depressing. Okay, back to the listing. Website closers presents a rare opportunity for an investor to acquire this 15-year-old premier company operating in the rapidly growing sports and military protective markets. Its extensive IP portfolio, established brand, an impeccable reputation, make it capable of becoming the fourth largest multi-billion dollar sports company in the world.

Their products are designed to protect people of all ages who are active in sports, as well as those in the military and law enforcement. The products are in high demand, but the company's limited capital has impeded sales growth. The company's proprietary and patented skews have generated several first and world products that boast a 40% repeat customer race and confirms its product's claims to protect and maintain companies. customer satisfaction. The sports products are made for kids and youth sports, as well as adults playing amateur and professional sports. You're prioritized protection or will to pay a premium for tested, proven, and certified gear.

Let's see. How much longer does this go? Oh my God. It keeps going. It keeps going. But I did notice that there's helmets for people playing pickleball in here somewhere. That was pretty surprising to me. Pickle ball.

We're going to have to wear a helmet to play pickleball now, I guess. So one thing they do here, and I'll pull it up, they talk about or they accidentally list the name of the company. And it is called Unequal.com. So let me pull that up here. We can look at the website while we're looking at it. So it looks like. Yeah, very interesting.

So we're pulling it up here. It looks like this guy has on some sort of, it's like body armor. We handle impact shock. differently and better than typical plastics and foams. They use battlefield armor and cutting-edge materials like Kevlar, Acceleron, and Triter to disperse impact away from the head and body, with over 100 patents, some of the finest military and police units trusted every day.

So here they have lacrosse player pads, a lacrosse player shirt. It looks like a lot of lacrosse stuff. Do they do other stuff besides that? Well, you want, I was thinking helmets. I mean, so are people wearing these vests? I was thinking it was head protection. Yeah, they have a liner that goes inside of your helmet to keep you from getting a concussion, I assume. Let's see, helmet liners.

Oh, here's their whole bunch of stuff. A bunch of different shirts, girdles, excrescelotons, insoles, padded sleeves, face shields, I think, is what this is. It looks like different. Interesting. That doesn't actually work. Their website doesn't work. Yeah, so it's a really interesting, like, anti-concussion. And then there's this idea of, I've never heard of this before.

They fight against this comotio cordis. It's the number one killer in baseball, number two killer in youth sports, is a lethal disruption with heart's rhythm that happens as a result of a sudden blow to the chest from a stick ball, our hand. Oh. Yeah, when people just get hit. Yeah, I've even. I've even heard about it happening in golf. If you could hit just the right moment

and the right place on your chest. It can happen. Because there's electricity running your heart. And if that little thing gets knocked out of whack, you're in trouble. It is extremely rare, though. So it's kind of interesting. Would you wear a vest for that?

Because the chances are so low, but interesting. So it seems like it's mostly like foam padding that can be put in different parts on a vest, in a helmet, different places. And it's got some kind of patent obviously a lot of patents to, you know, it's very specialized, obviously, the way this foam is made.

100%. Well, and this is great. This is something to like here is we're not, they're not selling increased performance for kids, which I think is a very crowded space. This is about like, hey, you're sending your kid out to play lacrosse or soccer or baseball or football. Like, you know, how much is your kid's safety?

and health worth for you as a parent. And like, it's a lot. Yeah, right. Now, the patents, I think, is where they must be coming up with the idea of this valuation. It's, this is my, I'm guessing, because they say they have over 100 patents. That seems like a lot of patents to me. You know, I've recently talked with someone who is in the business of ensuring trade secrets, which is sort of like a step below. You don't get something patented. And they were explaining to me why a lot companies are getting away from getting patents because when you get them, the information all becomes public and it becomes very easy for someone to kind of rip off your idea and just make something slightly different than that. So I don't know that, you know, I don't know that these patents

is certainly not worth a $300 million, I can't imagine, but I'm just trying to guess at where they came up with that number and I'm thinking it, they think there's that value in the patents. It seems like it. I mean, the way they talk about here, and I'll read here on the listing, the company's intellectual properties is a significant achievement. They have patents on these proprietary products in 24 countries, with their patent portfolio valued at 322 million. Google parentheses, Google purchased Motorola for $12.5 billion to acquire thousands of phone-related patents that enable Google to launch its phone dynasty. The company's extensive patent portfolio on sport and military protection will give the buyer a commanding presence in distinct advantage

in these markets. The brand has gotten recognition for products designed to offer production, from the Commodio Cordes and so on. So I think, I mean, if I'm understanding what the broker is saying here, they're saying you're not really buying an e-commerce business here. You're buying a set of patents that they've produced through their research

and you're betting that uptake on these type of things is going to grow as more and more, there's more and more mandates for safety, more and more parents are interested in it. And here they talk, about like there's a leading UK soccer team that has mandated all members wear head protection. And European soccer leagues are considering mandating head protection leaguewide, which will open

a potential market of 100 million players that would be required to wear rated, certified head protection for which the company is well known. All right, taking a quick pause here. I have something to tell you. This is Michael. I hate bookkeeping. I hate bookkeeping. I hate doing HR.

I hate doing all that kind of stuff. But for bookkeeping, I have found a solution. It is my friend Charlie's business called cloudbookkeeping.com. So that's cloudbookkeeping.com. They are your perfect partner if you want to get bookkeeping out of your hair and focus on making your company, your customers happier and more successful. So please give them a call, call Charlie, cloudbookkeeping.com, tell them we sent you. They're a great way.

If you're a business buyer, if you're a business owner, you're tired of hassling with getting your bookkeeping done. He's got a whole fleet of people that are. well-trained and work for him. He's located here in San Antonio, so I can tell you because of that, he's awesome. And they're a great partner for you to potentially call to help with all your bookkeeping needs so you can do the important stuff in your business rather than worry about getting your books right.

So give Charlie a call, cloudbookkeeping.com, and now back to the episode. And it looks like the head protection for soccer was, they showed it in some of the photos, looks kind of like a headband, like a sweatband, but it's thicker. and so it's not a helmet. They're not saying that the soccer players are going to be wearing a full helmet, but it looks like there's this padded sort of headband, which makes sense. I'm sure it adds a lot of protection. There they are.

I remember when I was a kid and I would do headers, and I would totally feel like my, I would totally feel like my bell had been rung multiple times. Yeah, I'm sure it was. I mean, honestly, my son played soccer and those could be brutal, those headers. and sometimes just crashing into each other, not seeing that the other person was coming at you. So I think that's,

there's probably a lot of growth, but I mean, 140 years worth of, I don't know. Why haven't they grown it? They've had the company 15 years. Sounds like they've, with over 100 patents, it sounds like the sellers are really into developing,

you know, and, you know, just developing new products and getting them patented, but they're maybe not, maybe they didn't focus a lot on the, the growth. But nonetheless, it's still only at 2.2 million in EBIDA, you know. Right. Yeah, valuations obviously just not realistic, unless there's some company out there that is doing something similar and these patents are just the thing they need to take off. Yeah. That's the only

thing I can imagine. You're betting there is going to. The only way this, I guess, makes anything close to sense is you're betting that this becomes a huge market that. that somebody has to have. But it's, you know, unlike cell phones, which at the time, I think they list the parallel there where Google bought Motorola for patents. And I think that was in 2013, 2014. Like, cell phones were already enormous.

Like it was pretty clear how that was gonna be worth $12 billion. But here you have this situation where it's like, okay, well, this is hopefully an emerging market because there's another solution to concussions from soccer, from headers. You just don't do headers. That's what... Oh, that is a thought.

Well, in some soccer leagues, like kid soccer leagues, you're not allowed to do headers. I think that makes sense, to be honest. It is kind of a strange, you know, it's soccer. It's all about the feet, and all of a sudden they're crashing heads. Now, I'm going back to my earlier comment, isn't it couldn't someone else develop similar, you know, padding? You know, is there something so special that this is the only padding that they would, that anybody would buy? this is what's going to be adopted across all these markets, or couldn't someone else develop something?

Yeah. Making these patents not that worthwhile. I mean, it is just padding. I don't know, you know, I'm not an expert here, but I feel like someone else could come along and make something pretty similar. Yeah. Well, there's... For less than $300 million, is my point.

100%. There is this question of, as you would look at this business, your due diligence would have a heck of a lot of visibility into what the patent portfolio actually looks like. And I think that's what they're saying the whole thing. They're saying the whole thing is, this is a highly defensive old patent portfolio, and that is the fundamental bet you would be making here, right?

Like, can you, you know, A, is this going to be a big market in the future? And then B, like, what happens when you try to go defend against competitors using your patent portfolio? And I think those are the two big questions. And I think, one, yeah, you could imagine that this becomes a multi-billion dollar industry. If, you know, given the trajectory of how we're going on protecting kids and investing to do that, the patent portfolio is a big question mark to me and something you would have to go dig into to understand. Yeah.

And, I mean, it's almost like, you know, it's defensible, right? So someone is going to copy it, right? If this market takes off, you're going to have lawsuits. I don't know. That's just a lot of gambles here, a lot of them. Can we talk about the other like red flag? Like, why is a company with a $300 million list price on website closers? Dot com?

I mean, usually my website closers is one of my favorite. They write great teasers, which is right. We do them a lot. But like they're known for like, you know, a portfolio of like, like, what's it called? The people do in astrology, right? Or like crossword puzzle websites, right? Like those, that's what I expect from website closers. And it's like, oh, no, no.

Hey, we're this like very niche IP portfolio that has been somewhat monetized. And it's $300 million. So. I don't think the buyer of something like this is going to be looking here. That's for one. Yeah. And I have a feeling this broker probably thought, oh, 2.2 million of EBITDA. Okay, that's in my lane.

I can do that. And then, you know, upon discussion, you know, the seller names their price about all this IP and it's $300 million and he's just putting it out there. That's my, that's my impression. This is one of those ones where at the universe of people for whom this would be worth $300 million, there's probably a handful of companies, you know, potentially. And it's like, and they probably already have a similar product, right? Don't they? Maybe. Padding at least, right? Of some kind. Maybe, yeah. And it's like, well, why is this publicly listed? Like, you know who they are, like, call them all.

It's just, it's just a, it just doesn't make much sense, except for helping us record like an awesome episode, which I'm totally cool with. Yeah. It is used by NFL, you know, all the big sporting leagues. Okay. So, oh, I'm sorry to interrupt you. It is, that's important to, I want to make sure I articulate what it says very clearly because it's not actually used by the sporting leads.

it's used by NFL, MLB, NHL, NBA, FIFA, Big Ten, SEC, and Olympic athletes. The athlete word is very important. That means they just have one person there who's a customer. It is not an NFL. There's nothing in here that does anything to say that it's officially sanctioned by any of those leagues. But this broker did a really smart thing, which is say something technically correct, but easily misinterpreted to indicate that, oh, this is like used by the SEC and mandated by them.

Like this would be great. But that does not appear to be the case. Well, I fell for it, Steve. Look, I was all impressed. And you're right. I was trying to figure that out. It's such a small company. How can they be selling?

You're right. It's the athletes from all those different sports. One or two uses it, puts an extra pad in their helmet or whatever, or where's the vest. Yeah, I think it's a great product. I think it's growth market where definitely the, the idea of safety and certainly anything that, you know, is related to concussions is a big deal and you're going to have growth. But I can't believe that these products are all that unique. And even the patents aren't all that unique. Like I said, you could, you could,

you could create something very similar, but slightly different and get your own patent and compete. It doesn't say where this is manufactured, does it? I did not see that. I'm assuming. Yeah, it doesn't say USA. So I'm assuming that means, that means it's Asia or somewhere overseas. It says here, the company typically means a six or 12-month inventory supply and orders replenishment products as needed. That would tend to indicate these are contract manufactured someplace overseas. Yep.

They put them here in a 16,000 square foot warehouse, which is not that big for $27 million. No. So this is a small company. It's got a unique product, probably a really cool seller that's into, you know, know, developing and inventing things, that's great. I just, I don't know where they're coming up with that price. And like, let's just say they came to a regular, you know, multiple on a 2.2. Then it might be a nice company. Then there might be something interesting. I mean, you'd have to do a lot of marketing to kind of, you know, grow and maintain your position.

I don't know. What multiple would you pay for something like this, Michael? I would be, it depends on how much they've been growing. so far. That would affect my opinion on it. But let's say they've been growing just five to 10 percent per year. I would be excited to own this business at five to six X, even though. Yeah, right. That's what it is. I think that's much more of a realistic investment thesis here. You know, this business is in a nice niche. It has this patent portfolio. You have a lot of pricing power and a very clear path to how you get to your target market, right? This is your, you go to Facebook, Instagram, you sell ads and you try to target moms who are

terrified that little Jimmy is going to get a concussion when he's playing lacrosse, right? And she's willing to pay whatever it is to feel better about Jimmy playing lacrosse. And so I think that gives you something awesome in terms of owning this business is you are not selling athletic equipment. you're in the business of selling peace of mind for Jimmy's mom. And I think that is just a great business to be in and gives you tons of margin to be able to raise prices and be able to hammer in on that specific niche and really own it. And that's why I'm saying, like, this would be a screaming deal for me at that 5 to 6x because I think you have tons of pricing power. I think you've got a lot of runway to grow.

I think it's a great place to be in. And that's making the assumption that this patent portfolio is probably just BS. That's how I see most patent portfolios turn into. They're mostly BS if you're trying to build an entire business around them. So anyway, I don't know. What do you think? That's, I agree with you. And I would really want to know how fast it's grown.

It's been around 15 years, so I don't think it's grown that fast. I think most of those 15 years, I mean, that's a lot of patents every year in 15 years. Right. So I think they've just been putting most their efforts into that and less so into marketing and finding their market, although the market has sort of found them. so they've got a good effective product. And I would be happy to own something like this too, right? But in your cocktail party test, this one would feel really good, right? You'd come in and say, you know, I protect, you know, children and athletes from, you know,

concussions and, you know, what does that come? I can't say it. Yeah, the hard stopping. Your heart stopping. The heart stopping thing. I mean, it would feel great. And that would be, you know, it's kind of a mission-driven. almost business that someone could feel just fantastic about owning.

It's just not, you know, it's a six multiple at the most. That's where it feels like a great deal and something to own. And then there's a big, for me, there's a big asterix. If this patent portfolio is real and you assume the market's going to keep growing, I could see it being that kind of, you know, worth it as a strategic purchase to another buyer, but as an individual investor, like it just doesn't make, you know, that's too big of a bet to make. And as a non-strategic, you know, so let's say Under Armour or Nike comes in and tries to buy something like this, you know, they have a huge distribution advantage. They can leverage. They can

try to explore that niche. But, you know, I don't know. Usually, those guys are pretty smart. Usually by now they've already looked at something like this and figured out it's not worth anywhere near $300 million. Or it's not strategic to them at all. And that's not a space they want to be in. So anyway, that's why it kind of doesn't make sense to me in terms of the story of how they got to this place. Right. Because you're buying it in addition to your helmet. You're not, you know, it doesn't, you're not buying it with your helmet. I don't know. It is someone that goes, like I agree with you. You're going out of your way to have peace of mind and feel like you've done everything you can to protect either your child or yourself, which is great. Didn't talk much about the military side of it, but now you're looking at that. Yeah, this is, it's kind of hidden in their website. I don't know how big of a business it is for them. They only have three, which is kind of a lightweight body shield, some sort of plasticy thing, and then a thing that like fits on their, some sort of helmety type thing that fits under a baseball cap.

It's like an under baseball cap helmet. That's pretty cool. That's pretty cool. I could probably use that when I'm around my teenagers. So. Well, that would be an injury. That's a growth market potentially. But, you know, selling to law enforcement is also really, usually a very long sales cycle.

and kind of requires an insider. Yeah. That's awful. Those are not easy. Yeah. All right. Well, look, I think it sounds like we would love to own this business as an e-commerce business, not as a $300 million venture play on an IP portfolio.

And if something were to change where they come down by, say, $285 million on their price, we could be interested in. It might be a good deal. we could do this and the worm farm. Yeah, we could be interested. You know, one-time sales, I think I would get much more excited about this. But this is something I wouldn't even really even start talking to somebody when they have this kind of, you know, it's clear they're looking for a buyer who's not me. That's totally fine.

They can get it. They can get it. Yep. No SBA loans on this one. I'm sorry. See, we're good. All right. All right.

Hey, let us know what you think about this episode. Leave us a review. We actually read the comments on YouTube, so leave a comment there. Just let us know what you think. Cool. All right. See, everybody.